Friday, April 30, 2010

FOMC Statement, April 28

The April 28 FOMC statement was pretty much identical to the previous one. It includes, for example, the usual (wrongheaded) Phillips curve logic:

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

As well, Hoenig puts in his two cents' worth, as before:

Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.

1. The FOMC is still announcing its interest rate target in terms of the fed funds rate. As I noted earlier, the relevant policy rate when there are positive excess reserves in the financial system is the interest rate on reserves. Either the FOMC does not understand this yet, or they think it might lead to confusion if they announced the target in terms of the interest rate on reserves (which of course would not be a target - the interest rate on reserves is administered). It should be easy to make this clear to the public, so my guess is that at least some members of the FOMC don't get it.

2. There is nothing explicit in the statment about offloading mortgage-backed securities and agency securities from the Fed's balance sheet. In line with what Kocherlakota has been saying in public (see here), the Fed should be committing to sell these assets at a constant rate. What should that rate be? I think they could sell the assets at the rate they bought them - no problem.